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Does Debt Consolidation Impact My Credit?
Debt consolidation can be an effective way to pay off multiple high-rate debts to save money and simplify your financial situation. If you consolidate your debt, it’s important to know that it affects different factors that are used to calculate your credit score. Read on for a quick overview of debt consolidation and how it may impact your credit.
Some ways to consolidate debt
Debt consolidation loan: This involves taking out a personal loan to pay off your current balances to get just one monthly payment. With lower, fixed interest rates and better terms, this option could help you save big on interest. The rates and terms you qualify for depend upon your credit score and financial situation.
Balance transfer card: High-interest credit card debt is transferred to a card with a lower interest rate. However, be aware of the APR you need to pay on it and know there is usually a 3-5% transfer fee (based on the amount you transfer).*
Home equity loan: You can borrow funds by tapping into the value, or equity, of your home. The fixed interest rates are often 4-12%, with longer repayment terms. The downside is that the loan is secured by your home (collateral); if you fail to repay it, you could lose your property.
How debt consolidation can help your credit
Helps you stay on top of payments. Because debt consolidation lets you roll multiple monthly payments into one fixed, affordable payment, it’s easier for you to make your payments on time, which has a big impact on your credit.
Shows that you’re a reliable borrower. If lenders have a record of you paying back loans, you will be considered a lower risk to lend to. That means you could secure better rates and terms next time you borrow.
How debt consolidation may hurt your credit temporarily
When you consolidate debt, your credit score may drop a few points. Why? When you consolidate, there will be a hard inquiry on your credit report. While it can be alarming to see your score drop, know that it is only temporary. Plus, it’s a small sacrifice to improve your financial situation overall.
If you borrow a large amount to consolidate debt, it could skew your debt-to-credit ratio, or credit utilization, high. Since credit utilization accounts for about 30% of your score*, that can have a big impact. But as long as you make on-time payments and don’t take on more debt, your credit utilization will go down, and your credit score will improve over time.
Want to learn more about how debt consolidation could help you pay off high-interest debt and improve your credit? Talk to a Lendmark expert at a local branch or connect with us online.